Managing International Financial Instability
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Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.
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Chapter 5: The crises of global finance

Fabrizio Saccomanni


5. The crises of global finance Madamina, il catalogo è questo. [Madam, this is the catalogue.] Lorenzo da Ponte (1787) from the libretto of Mozart’s Don Giovanni Financial markets are markets in information, and information by its nature is asymmetric and incomplete. It arrives on an unpredictable schedule and when it arrives markets react. Inevitably, then, sharp changes in asset prices – sometimes so sharp as to threaten the stability of the financial system and the economy – will occur from time to time. Barry Eichengreen (2002, p. 4) 5.1 HOW MANY CRISES? Financial crises with international repercussions have occurred throughout the history of the world economy, well before the word ‘globalization’ was coined and circulated in print.1 International lending, sometimes with unpleasant consequences for the institution providing the credit or for private investors, is nothing new. The examples abound.2 In 1343 the Florentine banks of Bardi and Peruzzi failed after King Edward III, to whom they had lent large sums of money, refused to honour the Crown’s obligations, producing the first case of sovereign insolvency with international implications.3 In 1720 the financial ‘bubbles’ generated by the South Sea Company in England and by the Mississippi Company in France burst, precipitating severe crises in the London and Paris stock markets and sending out international shockwaves.4 A more systematic analysis of crises from the inception of the Gold Standard (around 1880) to the end of the twentieth century reveals that episodes of severe financial turbulence, affecting the exchange rate, the banking system or...

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